Ringgit extends emerging-currency slump with oil as yuan steady

U.S. gold for December delivery rose 0.4 percent to $1,117.30 an ounce.

The PBOC called it a free-market reform but some saw it as the start of a long-term yuan depreciation to spur exports.

For years, the consensus view has been that as China’s economy outgrew the developed world, its currency would inevitably appreciate.

Indeed, the draconian response of the Chinese government to the recent stock market crash – large-scale temporary suspension of public offerings, caps on short-selling, and cuts in interest rates – exposes its reluctance to allow market forces dictate economic developments.

Given that the Chinese currency only dropped against the U.S. dollar, and that was described by the Chinese central bank as a one-time two per cent drop, no immediate or mid-range effect on trade is likely.

The recent underperformance by utilities and over performance by bank stocks, support the current bets in the market that the Fed will be raising rates for just the first time in close to a decade following its meeting in mid-September.

Besides imports, India’s exporters will also lose out on currency competitiveness to China in segments it competes directly with China-particularly textiles and apparels-as well as chemicals and project exports. Chinese banks paid better deposit rates than their U.S. counterparts and yields were even higher in the country’s shadow banking system.

The mechanism now also takes into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies. In this context, how China sets its daily fixing and manages FX market flows in the next few days will be very telling.

The yuan fell more than 4 percent at one point, pulling down riskier assets such as emerging currencies globally amid fears the devaluation would spark a global currency war, but financial markets began stabilising towards the end of last week as China slowed the pace of the currency’s depreciation. “From our point of view, the higher the cost to the Chinese for our raw materials, the better”. Stress from China continues to disturb traders this morning. Malaysian stocks suffered a 1.5 percent fall and the ringgit was stuck near a 17-year low.

While Beijing was maintaining its currency peg, these outflows forced the PBOC to sell foreign exchange reserves and buy renminbi.

However, since some Western countries such as the UK and other EU members have ignored US opposition and gone ahead to join the AIIB, it could be said that there is greater international openness to the renminbi acting as a counterbalance to the dominance of the US dollar.

But the impacts go beyond markets into the real economy. US President Obama is expected not to bring up the sensitive issue of currency exchange in the face of political issues such as nuclear warfare, techno spying, and China’s territorial claims in the Pacific, among others.